07:32 AM EDT, 09/13/2024 (MT Newswires) -- Scotiabank said it expects two more quarter-point Bank of Canada rate cuts this year in October and December followed by a cumulative 75bps reduction spread over early next year.

That should put the overnight rate at 3% by the second quarter of next year which would remain substantially higher than pre-pandemic levels, noted the bank. This forecast is little changed from previous expectations.

There are many uncertainties overhanging this forecast, stated Scotiabank. One is geopolitical developments including the United States presidential election and its potential impact on fiscal and trade policies. Other risks are domestic in nature. Mild excess capacity is expected to persist even as the supply side is expected to grow more slowly due to ongoing productivity challenges and curtailed population growth, but demand pressures could face greater strength than the bank forecasts and close spare capacity faster and as such limit rate cuts.

One such channel is fiscal policy being more stimulative than Scotiabank has incorporated. A federal election year beckons, and governments of any stripe that are down in the polls like the current one tend to engage in fiscal pump priming. Greater than-expected fiscal easing could complicate monetary easing.

More important could be views on the consumer and housing markets, pointed out the bank. To say there is an upside is a tough sell at present due to the recency bias; many households have been pressured by developments to date.

However, as forecasters look to the future, upside risk could come from a combination of pent-up demand, excess saving in narrow and broad forms, and the lagging effects of a population surge. The catalyst to this happening is that while high debt was a disadvantage in a rising rate environment, high debt confers more rewards to the Canadian economy relative to others as rates normalize.